Property Scope: Office market feels impact of Tennova decision

Tennova Healthcare on Tuesday said it is no longer planning to build a new flagship hospital on Middlebrook Pike in West Knoxville. The hospital system instead announced a new strategic plan to "reconfigure" services at its three existing Knoxville hospitals — Physicians Regional Medical Center in North Knoxville, Tennova North Medical Center in Powell, and Tennova Turkey Creek Medical Center in West Knoxville — and develop new outpatient centers in the Knoxville area. “Given the changes in the heath-care industry, building a new hospital is unnecessary and would not be prudent for our health system and the Knoxville community.”
Angela Gosnell/News Sentinel

Fictional detective Sherlock Holmes is famous for drawing conclusions from seemingly insignificant details, but one of his best-known cases was built on the absence of a clue - a dog that didn’t bark.

When it comes to commercial real estate, a similar principle can hold true. While pricey transactions and splashy deals get most of the attention, the biggest impact sometimes comes from an event that doesn’t happen.

The hospital that didn't happen

A case in point? The $303.5 million replacement hospital planned by Tennova Healthcare on Middlebrook Pike. In January, the company announced that it had scrapped the massive project, and will instead shuffle the service offerings at its existing facilities.

The new facility promised to re-shape Knoxville’s medical office sector, and its demise will be felt throughout the region. The most obvious ripple effect will be in the Middlebrook Pike corridor, where the Dowell Springs Business Park over the last decade has become a major outpost for health care in West Knoxville.

The scenic office park - located across from the hospital site targeted by Tennova - is home to medical providers including the Knoxville Comprehensive Breast Center and the Provision Proton Therapy Center, and last year saw the opening of a 52,000-square-foot office and surgery center for Gastrointestinal Associates.

How does this affect others?

Matt Fentress, an office broker and colleague of mine at NAI Koella | RM Moore, said Dowell Springs is mostly built out, and the hospital’s decision shouldn’t affect larger buildings that will be developed on the remaining acreage.

But he said smaller office sites and available condo units will feel the impact.

“Unfortunately, the hospital would have made Middlebrook Pike a lot more vibrant and a much more desirable area,” he said. “With that not happening, I think it will stay kind of status quo for a while."

Jerry Bodie is executive vice president of White Realty, which developed Dowell Springs, and acknowledged that his company was disappointed in Tennova’s decision.

But Bodie said the 109-acre hospital site is a great property that will eventually be developed, and said he’s working on a condo deal in the park with a medical prospect that knows the hospital isn’t coming.

Dowell Springs, he said, has “become a medical destination with a lot of great services offered there, and I think that will continue to attract more medical (users) even though the hospital’s not there. It’s just a great location.”

Physicians Regional Hospital sees bright side

Meanwhile, one beneficiary of the decision may be the community around Physicians Regional Hospital, in North Knoxville, and the independently owned medical office buildings that are adjacent to it.

The decades-old Physicians Regional presents numerous challenges from a design and infrastructure standpoint, and it was expected that many of the services it offered would have been moved to the new hospital.

Tennova now says it will relocate the childbirth services offered at its Turkey Creek hospital to Physicians Regional, which will become a specialized campus “focused on a select group of services.”

Lauren Rider, a newly elected member of the Knoxville City Council whose district is adjacent to Physicians Regional, said the hospital has been a reasonably good neighbor, and is a known entity. Some residents, she said, were concerned that the property could be converted to a more negative use, such as a detention center.

“It’s always nice to see stability and see something stay and not have to wonder what’s coming,” Rider said.

Given the ongoing turbulence in national health policy, it’s challenging to deduce the long-term prognosis for any sector of Knoxville’s medical office market.

But there’s no doubt that in the short term, the deal that didn’t bark will still have an impact.

Josh Flory is a commercial real estate broker with NAI Koella | RM Moore. He can be reached at 865-777-3030.